Wednesday, November 18, 2015

A Close Look At India’s New Arbitration Ordinance

[The following guest post is contributed by Sulabh Rewari, Partner at Keystone Partners and Poorvi Satija, LL.M. Candidate 2016 (Expected), Harvard Law School. Views expressed are of the authors alone.]

The Indian Government has recently promulgated the Arbitration and Conciliation (Amendment) Ordinance, 2015 (“Ordinance”). The key amendments made by the Ordinance and their impact is analyzed below –

1.         Agreeing to a seat outside India

Following the decision of the Indian Supreme Court in Bharat Aluminium Co. v. Kaiser Aluminium Technical. Services Inc. (2012) 9 SCC 552 (“Kaiser”), Indian Courts could not grant interim relief in foreign seated arbitrations. The Ordinance allows Indian Courts to grant interim relief (Section 9) and assist in the taking of evidence (Section 27), even when the seat of arbitration is outside India thanks to the proviso to section 2(2). It also addresses one of the problems that the Indian Supreme Court set out to resolve (albeit with disastrous consequences), in its infamous decision in Bhatia International v Bulk Trading S.A., (2002) 4 SCC 105.

This provision can be excluded by an agreement in writing. Therefore, the typical language that one would see in contracts involving Indian parties, such as “Parties agree that Part I shall stand excluded” should no longer be retained. This language will now have the unintended consequence of excluding access to interim relief from Indian Courts.

Whether two Indian parties can agree to arbitration outside India is still an open question, with a recent decision of the Madhya Pradesh High Court[1] holding that two Indian parties can agree to arbitration outside India. Significantly, the reference to “international commercial arbitration” in the proviso to Section 2 (2) implies that two Indian parties will not have access to interim relief from Indian Courts, if they agree to a seat outside India.

2.         Arbitration in India is now faster, cheaper and more effective

Limiting intervention to higher Courts

In case of international commercial arbitrations (where at least one party is foreign), petitions relating to arbitral proceedings, such as under section 11 and section 34, can be made directly to High Courts, which should aid faster disposal.

By virtue of Section 10 of the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Ordinance, 2015 (“Commercial Courts Ordinance”) (which has been concurrently notified in the official gazette), Court proceedings related to all arbitrations involving commercial disputes of a ‘specified value’ (as may be notified by the Government from time to time, being a sum of not less than INR 10 million), shall be heard by specially-designated Commercial Courts (both at the District Court level and at the High Court level). This should ensure that only trained and specialised judges would deal with petitions and applications relating to arbitrations.

Time-lines

The Ordinance imposes strict timelines for conduct of the arbitration (12 months from the date the arbitral tribunal enters upon reference) under section 29A, and disposal of challenges to an award in Court (12 months from serving of notice) under section 34(6), as well as for other applications made to the Court.

The 12-month timeline for the conclusion of arbitration can be extended by a period not exceeding 6 months by agreement of parties. If the award is not made within the 12-month period (or the extended 18-month period), the mandate of the arbitral tribunal would come to an end unless the Court further extends the time period for “sufficient cause” upon request by either party. Notably, this time limit is also applicable to institutional arbitrations.

This provision is not without teeth - the Court can replace any of the arbitrators, dock the fees of the arbitrators if they are responsible for the delay, and/or impose actual or exemplary costs on either of the parties. However, the requirement of approaching the Court will only add another procedural bottleneck and probably lead to further delays.

It is unclear who is to bear costs if the mandate of the arbitral tribunal ends due to the expiry of the time-period. Further, Court intervention in arbitration proceedings is fairly common in India and Section 29A does not clarify whether the time spent in litigation would be included in computing the time limits.

It also bears emphasis that the setting of time-lines, particularly under the provisions of the Code of Civil Procedure, 1908 have been interpreted by Indian Courts to be directory in nature, despite the use of mandatory language (such as “shall”).

Also, the power of the Court to appoint substitute arbitrator(s) under section 29A is problematic, insofar as it can defeat the right of a party to appoint a replacement arbitrator. There is no exception available for institutional arbitrations, and institutional rules will stand superseded to that extent. Replacement arbitrator(s) appointed by the Court are statutorily deemed to have received the evidence led in the arbitration proceedings till their appointment and the arbitration proceedings are to continue from the stage already reached.

The Arbitration and Conciliation Act, 1996 (“1996 Act”) (in its original formulation) leaves it to the arbitral tribunal to determine whether to repeat hearings, and this discretion continues with the arbitral tribunal unless the substitution of the arbitrator(s) is under section 29A (due to non-compliance with the stipulated timeline). While the endeavor is to avoid delay and that is laudable, parties may wind up with one tribunal member who can simply not follow the proceedings. This problem is exacerbated in India, as live transcription is rarely used in ad hoc arbitrations.

Finally, the time limits contemplated are wishful thinking. Indian Courts do not have the capacity or infrastructure to dispose of challenges to arbitral awards in one year.

Wider powers for arbitral tribunals to grant interim relief

The powers of arbitral tribunals to grant interim relief have been expanded and such orders have been made enforceable. Correspondingly, the newly introduced Section 9(3) whittles down the concurrent jurisdiction of Courts in relation to interim measures of protection, once an arbitral tribunal has been constituted. It is only in cases where the remedy under Section 17 will not be “efficacious” that a Court may be approached under the amended Section 9.

Limited grounds of challenge to awards

Grounds of challenge to awards, in arbitrations seated in India, have been curtailed by limiting the meaning of public policy, so as to exclude a review on merits.

In arbitrations between two Indian parties where the seat of arbitration is in India, Courts can also set aside an award on account of “patent illegality”. Patent illegality does not however extend to erroneous application of law or re-appreciation of evidence. Practically, this could lead to a situation where Courts will have enough leeway to examine the substance of arbitral awards between Indian parties arising out of arbitration proceedings with their seat in India. In the absence of professional arbitrators, a specialist arbitration bar and credible domestic institutions, it is unrealistic to insulate domestic arbitrations from judicial interference as one could in jurisdictions with a more sophisticated practice of arbitration.

There is no change in the position for arbitrations taking place outside India. Section 34 does not apply to foreign awards (for agreements entered into post-Kaiser). The grounds for refusing enforcement of a foreign award on the basis of “public policy” have been reiterated (consistent with the position articulated in Shri Lal Mahal Ltd. v. Progetto Grano Spa, (2014) 2 SCC 433), with the added clarification that the test of contravention of fundamental policy of Indian law will not entail a review on the merits.

No automatic stay of award

The Ordinance removes the provision for automatic stay of an arbitral award once an application under Section 34 is filed. The party challenging an arbitral award will now need to apply for a stay of the arbitral award, and the Court will need to provide reasons if it grants such a stay. Further, in an application for stay of arbitral awards for payment of money, the Court has to have due regard to provisions for grant of stay of a money decree under the Code of Civil Procedure, 1908 meaning that the Court may order for deposit of money or security in lieu thereof and may refuse the stay if such security is not furnished.       

Award of legal costs

The provisions for award of legal costs have been detailed. The Ordinance provides that as a general rule, an unsuccessful party must pay the costs of the successful party. The Court or arbitral tribunal awarding costs is to take into account conduct of parties, subversive tactics such as filing of a frivolous counter claim, and reasonable offers to settle. This should discourage delay tactics and frivolous applications/pleas during arbitral proceedings. Arbitration clauses that stipulate that parties will share costs will not have any effect, as the Ordinance provides that agreements assigning costs of proceedings to a party, will be valid only if executed after the commencement of the dispute.  

However, it is unclear from the provision as to whether an arbitral tribunal can award costs incurred by a party in arbitration-related litigation (especially applications under Sections 8, 9 and 11). Also, the retention of the word “reasonable” in the provision is problematic if the intention was to award costs on an indemnity basis. Indian Courts have interpreted “reasonable” costs to mean that “actual” expenditure is not awardable under the un-amended section 31(8) of the 1996 Act.

Fees of arbitral tribunal

The fees of the arbitrators are now linked to the amount in dispute and arbitrators cannot charge for each session. This will lead to fewer physical hearings and promote efficiency in the conduct of arbitral proceedings. In general, the fees of arbitrators will be reduced and it has been left to the High Courts to frame rules to determine the fees of an arbitral tribunal and the manner of its payment, taking into consideration the rates specified in the Fourth Schedule to the Ordinance. As an unintended consequence, arbitrators in India may have lesser incentive to take up ad hoc arbitrations between two Indian parties.

These provisions do not apply to arbitrations in which either party is foreign or to institutional arbitration.

3.         Arbitration in India should be ‘cleaner’

Stricter rules on bias and conflict of interest have been introduced by the Ordinance. These rules were much needed, and practitioners would agree that self-regulation on this front has failed in India.

The Ordinance sets out as guidance circumstances that give rise to justifiable doubts as to the independence and impartiality of arbitrators in the Fifth Schedule to the Ordinance.

The Seventh Schedule to the Ordinance sets out circumstances that will render a person ineligible to be appointed as arbitrator. The applicability of this provision can only be waived by parties by an agreement in writing after disputes have arisen. This amendment is commendable and will lead to discontinuance of the prevalent practice of state entities nominating their employees as sole arbitrators.

Both the schedules described above are modelled on the IBA Guidelines on Conflict of Interest in International Arbitration. The efficacy of ‘freezing’ soft law in this manner can be questioned. These standards will evolve, particularly for the Fifth Schedule, and legislative amendments will once again be required to update them. This is especially problematic, given how long it has taken to introduce reform in this area of law.  

Further, these standards could have been customized for cultural context and local practice. For example, two differences between India and ‘arbitration-friendly’ jurisdictions which could have been taken into account in drawing up the Fifth Schedule are the limited pool of professional arbitrators and the near absence of arbitrators from law firms in India. 

4.         Other changes

- The Ordinance introduces a fast track arbitration procedure which can be utilized for routine contracts. An award must be made within six months in a fast track arbitration. An oral hearing is unnecessary, and the dispute can be decided on the basis of written pleadings.

- An Indian company with central management and control outside the country cannot result in an arbitration falling within the definition of “international commercial arbitration”. This was the position following the Indian Supreme Court’s decision in TDM Infrastructure Private Limited v. UE Development India Pvt. Ltd. (2008) 14 SCC 271, but could have been liberalized in the Ordinance.

- Section 8 of the 1996 Act has been amended to stipulate that a judicial authority should refer parties to arbitration unless it determines, on a prima facie basis, that there is no arbitration agreement. This determination was previously held by judicial pronouncements to require a final determination as to the existence and validity of an arbitration agreement. The provision has also been expanded to include not only a party to an arbitration agreement, but also any person claiming through or under it.

- Sub-sections (4) (5) and (6) of Section 11 have been amended and the references therein to the “Chief Justice or any person or institution designated by him” have changed to “the Supreme Court or, as the case may be, the High Court or any person or institution designated by such Court”.  The intent seems to be to move away from the debate on whether the exercise of such a power is a judicial one or an administrative one and the focus is simply on the examination of the existence of the arbitration agreement. Interestingly, this examination of the existence of the arbitration agreement, is not limited to a prima facie standard, unlike under the amended Section 8.

- Finally, the Ordinance merely states that “it shall come into force at once”. It does not specify whether any of its provisions operate retrospectively. Absent such a stipulation, it is likely that the provisions of the Ordinance will not apply to arbitral proceedings that are underway and Court proceedings that have arisen, or are yet to arise in relation to pending arbitral proceedings.

Overall, the Ordinance successfully captures the orientation of decreasing court interference in arbitration in India and incorporates many of the suggestions of the 246th Law Commission Report. However, in leaving out other changes suggested by the Law Commission Report, particularly the provisions clarifying on the emerging role of an emergency arbitrator, and the arbitrability of fraud in India, the Ordinance does miss some opportunities for reform.

- Sulabh Rewari & Poorvi Satija




[1] FA 310 of 2015 – Sasan Power Limited v. North American Coal Corporation India Private Limited (Madhya Pradesh High Court), http://indiankanoon.org/doc/88948563/

No comments: